Abbey criticised over five-times-salary mortgages

Debt counselling groups today expressed concerns over Abbey's decision to offer borrowers mortgages of up to five times their income in a move the bank said was in response to customer feedback.

Traditionally, lenders have offered a maximum three and a half times income. Abbey today became the latest in a string of mortgage providers to increase the amount it will lend. "People need to borrow more because house prices are rising," a spokesman for the bank said.

Recently, Bristol & West and Bank of Ireland, both part of the same group, increased the amount they would lend to either 4.5 times the main borrower's income plus one times the second income, or four times joint income.

In March this year, Nationwide increased the income multiplier that forms part of its affordability criteria from 3.25 times income for both joint and single buyers to 4.25 times.

But the Citizens Advice Bureau's social policy officer, Peter Tutton, said the increase could leave borrowers with unsustainable debts.

"Based on a capital repayment mortgage, homebuyers borrowing five times their income could find that 40-50% of their income after tax is used up on mortgage repayments. That's before you take into account pensions, travel costs, utility bills and other expenditure."

Mr Tutton added: "More and more people are coming to us with financial difficulties when they thought at the outset that their debt was manageable. If you are overstretched, you do not need a large life-changing event to push you into problems. It could be as simple as the boiler breaking down."

Malcolm Hurlston, chairman of the Consumer Credit Counselling Service, described the move as a "path towards homebuying, but with a precipice to one side of it".

"The people who are likely to be attracted to this kind of mortgage will be first-time buyers, and we know that these are the people who are most vulnerable to the life changes that can push people into serious financial difficulties," Mr Hurlston said.

"People need to think seriously before they take on this kind of debt. They need to think about whether homeownership is really the right move for them."

Loans worth several times a buyer's income are not new. Ray Boulger, senior technical manager at leading independent mortgage broker John Charcol, said: "It has been possible to get similar loans from other lenders for a while now.

"Huge increases in house prices in recent years have left many would-be homebuyers out in the cold and lenders, across the board, have been redesigning their product ranges and criteria to try to help borrowers achieve their home ownership goals."

However, there have been concerns that increasing the amount people can borrow will simply feed the cycle of house price inflation, and therefore increase affordability problems.

Vince Cable, Treasury spokesman for the Liberal Democrats, said: "While the banks may claim they are trying to help first-time buyers, in reality it will only stoke the housing market further, putting the dream of home ownership out of reach for many more people."

However, Mr Boulger said borrowers needed to be equally strict with themselves when taking on a mortgage. "While lenders must carefully consider each innovation before launching it, there must also be an onus on the borrower to take responsibility for their actions.

"There will be some who feel perfectly comfortable borrowing five times their income, because they live a lifestyle which means they can afford it. However, there are others who for one reason or another will not be able to cut back enough on their spending to afford a mortgage of this size and for whom this size of mortgage is not suitable."

Boulger concludes: "With interest rates hotly tipped to increase not just once, but possibly twice in the next few months, borrowers need to ensure they are not overstretching themselves, especially if they do not have a fixed rate mortgage, and that if their monthly repayment increases they will still be able to make ends meet."

Abbey said it applied strict lending criteria and would make sure its mortgages would remain affordable even if interest rates were to increase.